China Becoming Largest Gold Consumer As Smuggling Increases In India

Bloomberg reports that China overtaking India in gold demand.

(emphasis mine) [my comment]

China May Overtake India in Gold Demand, Council Says
By Sophie Leung

July 24 (Bloomberg) --
China may overtake India to become the world's top gold consumer this year, the World Gold Council said, as the nation became the first of the major economies to rebound from the global recession.

Jewelry demand in China expanded in the first quarter while dropping in India, Marcus Grubb, a managing director at the London-based council, said today at a conference in Hong Kong. Chinese gold demand will keep rising, he said.

China's economy grew 7.9 percent in the second quarter after a 4 trillion yuan ($586 billion) stimulus package spurred record lending and consumption. India's gold purchases slumped 54 percent in the six months ended June after a decline in the rupee pushed up the cost of owning bullion, cooling demand from housewives and jewelers, the Bombay Bullion Association said.

"There is a possibility that
China might overtake India as the world's largest gold consumer this year," Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. "India's gold consumption is reportedly dropping this year due to the financial crisis."

Total demand from India in the first quarter fell 83 percent to 17.7 metric tons, from 107.2 tons a year earlier, according to figures from the World Gold Council. Purchases in China rose 1.8 percent to 105.2 tons from 103.3 tons.
Total Chinese demand for gold was six times that of India in the first quarter, the council said in May.

'Consumption Growing'

"China's consumption is growing and this year's will surely be more than last year's," Hou said.

China consumed nearly 400 metric tons of gold last year, while demand in India was more than 650 tons, according to council data, which cited statistics from GFMS Ltd. Global demand rose 3.8 percent to 3,658.6 tons, or $101.8 billion, the council said Feb. 18.

Bullion prices have gained 7.6 percent this year as the global recession spurred demand for safe haven assets. Gold for immediate delivery was little changed at $949.65 an ounce at 5:39 p.m. in Hong Kong.

China, the world's biggest gold producer, has increased reserves by 76 percent to 1,054 tons since 2003 and has the world's fifth-biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.

Growing demand in China won't necessarily [will] boost imports of the metal as [all domestic production is going into China's gold reserves] rising production may be able to satisfy additional consumption, said the World Gold Council's Grubb. China's production of gold has risen at rate of 7 percent to 8 percent annually over the past five to six years, he said.

Imports

"It depends if the demand is rising faster than production," Grubb said in an interview. "At the moment, they are roughly in balance." China will seek to boost gold output to 290 tons this year from 282 tons in 2008, the Ministry of Industry and Information Technology said on March 20.

Gold imports by India in the six months ended June 30 plunged to 63.8 tons from 139 tons a year earlier, the Bombay Bullion Association said July 13.
[Official] Imports may fall further after the government doubled the import duty this month, it said.

"India's gold demand as reflected in imports have fallen drastically in the first six months," Harmesh Arora, vice president of the Indian association said today in a phone interview from Mumbai. "There are still no signs of demand picking up as global prices are moving higher," said Arora, who also believes China could overtake India in gold consumption.

Still,
India meets most of its demand from imports, some of which are brought in through unofficial channels and are not represented in official data, said Mukul Sonawale, partner of Mumbai-based Narrondass Manordass Co. and a past president of the Bombay Bullion Association.

"China can emerge as the world's biggest consumer only on paper," he said. "The official figures of imports will be quite deceiving as they don't capture all the imports. With India doubling the import duty on gold, the unofficial channel is bound to increase."

Commodity Online reports that hike in import duty to spur gold smuggling in India.

Hike in import duty: Gold smuggling to spur in India
By Jon Nadler
2009-07-07 18:35:00

...
Over in India, where import duties were doubled on bullion as of yesterday, the World Gold Council envisions gold making its way into the country the 'old-fashioned' way; on little boats belonging to smugglers. Where there is a will (ingness to buy gold) there will be a way (found to fill such need). Just remains to be seen how much or how little gold will be demanded in the home stretch of the year if in fact four-digit gold price predictions prove to be valid.

...
More on India gold smuggling:
India banned gold imports in 1947, net imports (practically all of it illegally smuggled) increased progressively to 80-90 tons per annum during 1950s and close to 150 tons per annum during 60s and early 70s. [banning gold imports didn't work very well]

After the sharp decline in the 1970s gold imports again surged in the 1980s and following the lifting of the ban and permitting of imports in 1992, the rate of imports increased sharply in 1990s.

There was a big spurt in gold consumption in India following economic liberalization of gold imports in 1992. Gold consumption remained around 400-425 tons in the next couple of years. Before resuming the rising trend, estimated consumption was more than trice the level recorded in 1990 and nearly 70% higher than in 1992.

Till 1991 practically all these imports were obtained by smuggling. But with liberalization, the share of smuggled gold has progressively declined both in absolute terms (from an estimated 290 tons in 1994 to 94 tons in 1998), and even more so in relation to total consumption (from over 70 percent in 1990 to less than an 80 in 1998).

The decline in smuggled gold was the direct result of progressive realization of gold imports (subject to payment of 15% duty) and a considerable narrowing in the margin between international and domestic price of gold. This margin in 1998 was close to the import duty on gold. However the volume of smuggling (90-100 tons a year) remains quite large in India. A smuggler who successfully escapes the customs net stills stands to make substantial profits [those substantial profits have now doubled with the doubling of import duties on bullion].

A major step in the development of gold markets in India was the authorization in July 1997 by the RBI to commercial banks to import gold for sale or loan to jewelers and exporters. Initially, seven banks were selected for this purpose on the basis of certain specified criteria like minimum capital adequacy, profitability, risk management expertise, previous experience in this area, etc.
.

My reaction: On paper, China is set to become the world's largest gold consumer as gold smuggling increases in India.

1) China will overtake India to become the world's top gold consumer this year (at least on paper).

2) Jewelry demand in China expanded in the first quarter while dropping in India.

3) Total Chinese demand for gold was six times that of India in the first quarter

4) China consumed nearly 400 metric tons of gold last year, while demand in India was more than 650 tons

5) China, the world's biggest gold producer, has increased reserves by 76 percent to 1,054 tons since 2003.

Rising gold smuggling in India

1) India meets most of its demand from imports, some of which are brought in through unofficial channels and are not represented in official data

2) India doubled import duties on bullion this month.

3) With import duties doubled, gold inflows in India from unofficial channel is bound to increase, making official figures of imports particularly deceiving this year.

4) Historically, Indian gold imports have increased despite bans and import duties.

5) A gold smuggler who successfully escapes the customs net stills stands to make substantial profits, especially now that import duties on bullion have been doubled.


Conclusion: With smuggling sure to rise due to the doubling of import duties on bullion, official statistic are guaranteed to show China as the largest gold consumer this year. However, If smuggled gold is factored in, then the numbers for Chinese and Indian gold consumption should be fairly close this year.

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2 Responses to China Becoming Largest Gold Consumer As Smuggling Increases In India

  1. Anonymous says:

    To say that China and India are large gold consumers is somewhat misleading or imprecise. Gold can not really be consumed. Gold can only be accumulated. Oil is consumed, while all the gold ever mined is still around. In that sense, we consume oil, but we accumulate gold.

  2. What do you make of this bizarre story:
    http://tinyurl.com/mc5pev

    a "trawler" loaded woith gold and silevr gets scuttled, then the metals are slavaged? Very strange.

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